‘Grantosis’ by Szymon Janiak

The post was originally published in Polish on Szymon’s LinkedIn profile. Szymon kindly agreed to republish what we think is of great value to our readers.

Startups take millions in subsidies and then collapse completely. Everyone loses. Public money can be the direct cause of such a state of affairs. It’s supposed to help, support, and develop. In practice, however, for various reasons, it can lead young companies to problems and end.

I’ve seen it dozens of times. There is no one specific culprit here. This is a two-sided problem that affects both grant providers and grant recipients. Institutions that have public funds at their disposal often don’t understand the specifics of the startup functioning. CEOs of innovative companies, on the other hand, often take money just because it’s available, without thinking about the consequences at all. There are a number of problems, and this leads to difficult questions.

The first is the lack of flexibility. Startups at an early stage can change their strategy, including technology, every 3 months. The subsidy, on the other hand, often assumes that they cannot change a single comma in the development plan for two years. What happens after six months if it turns out that the project makes no sense? Give up the money and fall? Or maybe stick to a technology that turned out to be nonsense on the commercial market, just to keep going? 

The second problem is the so-called ‘grantosis’. The entity’s morbid dependence on public funds, without which the company cannot function under normal market conditions. Inflated costs and overgrown operating structures with no revenue or minimal traction. What if the grant runs out? Tell employees that from now on everyone will have lower salaries? Terminating the office and cutting off benefits? Or maybe apply for more money?

The third problem is cashflow. Young companies often don’t have funds, so they look for money, e.g. from investors. In an extreme situation, the entire cash flow depends solely on one entity. What if there are doubts about the implementation and you need to stop withdrawals? What if the institution delays the settlement of the application for an advance payment for several months? 

And this is just the tip of the iceberg…

Grants can actually be a great tool for development that can take a company to a completely different level. However, this tool is neither good nor bad in itself – it is a matter of how it will be used. It is certainly not a solution for everyone. It’s not ‘easy’ money. There are a number of restrictions and requirements that must be met. Importantly, there are also other options for financing the company.

The worst thing is when a startup decides to take a subsidy only because it is running out of money and has a problem generating revenue. You always have to think about the consequences. Grants cannot replace clients, this is not the way.

The comment section had to add:

The first problem you write about is strongly related to how grant applications are written. The ability to write an application so that it is flexible or ready for changes after the fact (because you can do it) is an important competence. You need someone who understands the product, understands the technology, can plan product development incrementally and will help the person writing the application describe it well. Then flexibility is possible – I have been through it many times. We have radically changed the contractors, scope, and delivery method in the project for over 20 million. And it was possible. People dealing with grants simply need support.

– Łukasz Filut, CEO at PluckyRebels

Subsidies can also spoil the market. Beneficiaries must generate the declared level of sales at some stage. In order to maintain the indicators, they must dump prices and reduce quality. This, of course, lasts very shortly, but it’s enough to destroy the competition that doesn’t have these subsidies at hand, which ultimately leads to the devastation of the markets.

– Arnold Adamczyk, Co-Founder and CTO at Sunway Network SA